Unequal Pay or Unequal Employment? What Drives the Skill-Composition of Labor Flows in Germany?

Abstract

Die Dis cus si on Pape rs die nen einer mög lichst schnel len Ver brei tung von neue ren For schungs arbei ten des ZEW. Die Bei trä ge lie gen in allei ni ger Ver ant wor tung der Auto ren und stel len nicht not wen di ger wei se die Mei nung des ZEW dar.Dis cus si on Papers are inten ded to make results of ZEW research prompt ly avai la ble to other eco no mists in order to encou ra ge dis cus si on and sug gesti ons for revi si ons. The aut hors are sole ly respon si ble for the con tents which do not neces sa ri ly repre sent the opi ni on of the ZEW.Download this ZEW Discussion Paper from our ftp server:http://ftp.zew.de/pub/zew-docs/dp/dp11074.pdf Das Wichtigste in Kürze Non-technical summaryRegional economic prospects to some extent seem to hinge on the region's human capital endowment and, thus, its ability to attract skilled labour. For any related policy, it is thus important to better understand the determinants of skill-selective migration.As the main selection mechanism, the existing literature suggests that individuals move to regions that best reward their skills in terms of wages. For this reason, skilled individuals with a choice between two regions that have the same average wage rate should prefer the region with the higher wage inequality, while unskilled individuals should avoid such regions. While this selection mechanism has been empirically confirmed for the US, evidence within the German context is much weaker. We suspect that regional wage rigidities resulting from central wage bargaining prevents a wage-based selection mechanism and, therefore, propose an additional employment-based selection mechanism. The main idea is that income differentials rather than wage differentials determine skill-selective migration. Since the probability of being employed is not equally distributed across the workforce, but tends to increase with the skill level, unskilled individuals should avoid regions with a high employment inequality.In fact, an extended framework predicts skilled workers to be disproportionately attracted to regions with higher mean wages and employment rates as well as higher regional wage and employment inequalities. We test these predictions for gross labour flows between 27 regions in Germany. For this purpose, we estimate the observable skill level of an average labour migrant for each gross flow across a ten year period. In addition, we estimate the parameters of the regional wage and employment distributions for each region and year. Using both a labour flow fixed effects model as well as a GMM estimator, the findings suggest that regional differentials in the employment distribution turn out to be important. In particular, a region attracts an increasingly skilled inflow of migrants, the higher is its average employment rate (i.e. the lower its unemployment rate). The same is true for an increasing employment inequality. The less equal employment chances are spread across the regional workforce, the more a region attracts an increasingly skilled inflow of migrants. In contras...

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